Lawrence Berkeley National Laboratory

This paper presents new results on the link between energy factors and commercial mortgage default. First, we summarize results from an empirical analysis of the impact of source energy use intensity (EUI) and electricity prices on mortgage default. We used a unique data set that merges building-level energy use data from city benchmarking ordinances and financial data for commercial mortgages on the same buildings. We found that building source EUI and electricity price are statistically and economically associated with commercial mortgage defaults. Next, we present five case studies on the impact of energy use and price variations on default risk: three office buildings, a hotel, and a multi-family residential building. We use the empirical model coefficients to compute the default risk impacts due to variations in source EUI and electricity price over the course of the mortgage term. We found that variations in source EUI could raise or lower the default rates in these properties by between 5% and 40%, depending on the property type and geography. Electricity pricing has an even greater effect – roughly 60% change in default rate in the Denver area and nearly 90% in northern California. Finally, we propose an energy risk score that lenders can use to assess energy risk and inform mortgage terms. The score is being developed and piloted in collaboration with three mortgage lenders. We conclude with implications of this score as a market signal and mechanism for incentivizing energy efficiency investments through the commercial mortgage channel.